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Right time to buy a pharmacy?

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Right time to buy a pharmacy?

As Vinku Shah explains, there are several economic factors to be considered when deciding if you should invest in a pharmacy in the current climate…

 

Historically, community pharmacy has been a largely stable business that tends to survive economic downturn as evidenced by the financial crash of 2008 and more recently, the Covid pandemic. But let’s look at the key factors that should influence your decision to acquire a pharmacy.

 

Supply

At present there is an unprecedented number of pharmacies on the market due to LloydsPharmacy's decision to offload a number of their branches on top of independent contractors and smaller multiples also looking to sell for various reasons e.g. retirement sales, divestment decisions, etc.

As a result of the level of supply of pharmacies on sale coupled with Lloyds price ranging from 50p to 70p in the £ of turnover, we have seen a drop in overall valuation multiples. This may be an opportune time for first time buyers as well as business owners to add to their portfolio.

 

Inflation

We have seen the highest rate of inflation on record in the UK which peaked at 11.1% in October 2022 (4.2% - October 2021). Latest available data shows inflation rate at 10.4% in February 2023 and has impacted all business sectors. Community pharmacy has seen the cost of medicines impact their margins and forced business owners to rethink their buying strategies.

Costs of running a business have gone up and all suppliers have had to pass on the inflationary increases to their customers. Pharmacy businesses cannot pass on cost increases on NHS dispensing due to fixed funding and therefore they must employ astute buying practices to make similar gross margin and profit.

An indirect impact of inflation is in the form of increased staff costs as they are hit with the cost-of-living crisis and need to maintain their level of disposable income. Independent contractors can cut the cost by working in the business, but the staffing levels need to be maintained to provide a high level of services to patients.

 

Loan Interest

The Bank of England base rate has been below 1% for more than 13 years from March 2009 before it was raised to 1.25% in June 2022. To counter inflation, the Bank of England has had to increase the base rate which currently stands at 4.25% and we do expect further interest rate rises albeit not as many as we have had in the past 12 months.

This has had an impact on borrowing and funding acquisitions as lender’s have tightened their lending criteria. Potential buyers will have to forecast cashflows and demonstrate affordability to lenders. Buyers can still access funding provided they have sufficient deposit and other assets such as property with decent equity or are funded by “the bank of mum and dad” in part.

 

Brexit

Brexit has brought about supply issues translating into medicine shortages. This has meant that contractors have had to source other alternatives that are often more expensive as well as causing delays in dispensing medication to patients.

Another impact of Brexit has been the shortage of staff due to complications around visa applications and pharmacies having to rely on locums that are more expensive.

 

All doom and gloom?

Despite the economic factors affecting the community pharmacy sector, the market remains buoyant and there are opportunities for first time buyers as well as contractors looking to expand their estate.

Goodwill prices has come down from pre-covid times and presents opportunities to first time buyers to snap up pharmacies that previously could have been out of reach provided they have sufficient deposit and meet the lender’s criteria. For an owner manager to acquire a pharmacy from a multiple or independent chain has the benefit that they can almost immediately increase turnover and profits because of the personal level of services they can offer.

For an independent chain, any competing multiple pharmacies on the market offer an opportunity to gain a bigger market share by taking out competition through acquisitions.

We envisage the staffing situation to settle as 237 Lloyds Sainsbury’s branches, seven Asda and eight Tesco pharmacies close, and that pool of staff becomes available.

With the five-year Community Pharmacy Contractual Framework ending in 2023/2024, there are more conversations between various lobbying groups and the government on the importance of community pharmacies and the need for increased funding.

There is hope that community pharmacy funding will be taken more seriously as they were at the forefront during the Covid-19 pandemic and community pharmacy is now being seen as a means to alleviate pressure on the NHS as well as GPs.

 

Vinku Shah is a partner at Silver Levene LLP. Silver Levene offers a fixed price package service for valuation, cashflow and profit forecast, raising loan finance, due diligence, accountancy and tax services to community pharmacy businesses.

 

 

 

 

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